UNCTAD downgrades global economic growth forecast

The UN's trade and development body has downgraded its global economic growth projection for 2022 to 2.6% from 3.6% due to the Ukraine war and to changes in macroeconomic policies made by countries in recent months, Report informs referring to an update to the UNCTAD Trade and Development report.

While Russia will experience a deep recession this year, significant slowdowns in growth are expected in parts of Western Europe and Central, South and South-East Asia.

“The ongoing war in Ukraine is likely to reinforce the monetary tightening trend in advanced countries following similar moves that began in late 2021 in several developing countries due to inflationary pressures, with expenditure cuts also anticipated in upcoming budgets,” reads the report.

UNCTAD is worried that a combination of weakening global demand, insufficient policy coordination at the international level and elevated debt levels from the pandemic, will generate financial shockwaves that can push some developing countries into a downward spiral of insolvency, recession and arrested development.

“The economic effects of the Ukraine war will compound the ongoing economic slowdown globally and weaken the recovery from the COVID-19 pandemic,” UNCTAD Secretary-General Rebeca Grynspan said.

“Many developing countries have struggled to gain economic traction coming out of the COVID-19 recession and are now facing strong headwinds from the war. Whether this leads to unrest or not, a profound social anxiety is already spreading.”

“Even without lasting financial market disruptions, developing economies will face severe constraints on growth. During the pandemic, their public and private debt stocks have increased. And issues that receded from view during the pandemic, including high corporate leverage and rising household debt in middle-income developing countries, will resurface as policy tightens,” the report noted.

According to the report, the main advanced economies are on course to reverse the stimuli enacted during the pandemic, by tightening policy rates, unwinding central bank asset purchases and closing down furlough programs, transfers and support to businesses and households: “This is happening even though inflation has not yet led to sustained wage growth, making the threat of wage-price spirals unfounded.”

The report warns that these shifts will weaken global demand and dampen growth, with investment already stalling in some countries: “The threat of a sharper drop in investment and growth cannot be ruled out if interest rates rise far too quickly and with the climate challenge bumped off the news headlines. This is the wrong policy trend at the wrong time.”

The report notes that developing countries, which have incurred larger costs to cope with the pandemic, face additional constraints on demand and balance of payments obligations as a result of the recent policy shift in advanced economies.